America's debt load continues to rise. According to the latest Quarterly Report on Household Debt and Credit from the New York Federal Reserve, our collective debt is $13.54 trillion as of Q4 2018.
While the vast majority is mortgage debt, credit card debt topped a trillion dollars recently, and we're compounding the problem by paying more in interest and fees on our credit card accounts.
According to MagnifyMoney, Americans paid $113.3 billion in credit card interest and fees in 2018. That's a 12% increase over the $101 billion paid in 2017 and a 49% increase from the $76.3 billion paid in 2013. Credit card interest and fees are expected to top $122 billion in 2019.
Increased average annual percentage rates (APRs) on credit cards are partly to blame. Federal Reserve data shows that the average interest rate hit 16.86% in 2018, almost a four-percentage-point increase over 2014.
However, there's a simpler root cause – we regularly charge more than we can afford to pay off at the end of each month. Interest isn't an issue if you don't carry a balance.
Experian data shows that credit card holders carry an average balance of $1,841 on store credit cards and $6,354 on non-store credit cards. Using data from the Federal Reserve and the Consumer Financial Protection Bureau (CFPB), MagnifyMoney estimated that Americans carry over $682 billion in unpaid credit card debt from month to month. Approximately 70 million Americans – around 40% of active credit card users – don't pay their balances off at the end of each month.
The American Bankers Association shows that 43.8% of credit card accounts aren't completely paid off at the end of each month – and the debt problem is aggravated since consumers who carry balances tend to carry higher ones.
To put that in perspective, consider the average $6,354 balance and 16.86% APR. If you only apply $100 a month to reducing that debt, you'll need over thirteen years to pay off your debt and you'll pay over $9,600 in interest costs. A thirteen-year payoff also assumes that no other charges are made. Could you go without charges for thirteen years?
With a $500 monthly payment, the payoff time drops to fifteen months. You'll pay just under $700 in interest – but this calculation still assumes that you're making no other charges. Even for fifteen months, that's unlikely.
Says Senior Research Analyst Kali McFadden of LendingTree, which owns MagnifyMoney, “Consumers probably aren't as sensitive to APRs on credit cards as they are to APRs on other kinds of debt products because they don't plan on carrying balances for a long period of time, even if they wind up doing exactly that. A lot of people who are carrying big balances on high-interest cards could consider transferring their balances to cards with introductory low or no interest rates or paying them off with a lower interest personal loan. They key is to budget a certain amount each month to religiously pay off that new card before higher interest kicks in or the set amount required by a personal loan."
How do you get rid of your credit card balance and eliminate interest charges and fees? Review your budget and look for areas to cut expenses (and increase income where possible). You can't make headway on reducing debt until you're spending less than you make on a regular basis.
Once you've got a regular monthly surplus, start applying it toward your credit card debt. You can speed things along by transferring your outstanding debts to a balance transfer card with a 0% introductory APR – but only consider a balance transfer card if you can pay off the entire debt within the introductory period.
It's also important to make all payments on time. Missed payments can trigger penalty fees, higher interest rates, and the loss of your grace period. Without a grace period, interest starts accruing from the time of purchase instead of the end of the billing period. The effect on total interest can be huge.
America may be racking up record totals of credit card interest and fees, but you don't have to contribute. Let the credit card companies make money off others for a change.
If you want to reduce your interest payments and lower your debt, join MoneyTips and use our free Debt Optimizer tool.